Here's what Castro's death and Trump's victory mean for Cuba's economic reforms

People
walks pass a graffiti of Cuba's late president Fidel Castro in
Santiago de Cuba, Cuba December 3, 2016.REUTERS/Enrique de la Osa

Before his death on Nov. 25 at the age of 90,
Fidel Castro had made no secret about his reservations about the
normalization of relations with the United States and had
insisted that the ideals of the Cuban Revolution would never be abandoned.

So following his death it is natural to wonder if the economic
reforms initiated by his brother, Raúl Castro, will accelerate or
what else might happen.

Since his death, we haven’t seen any instability. This is
unlikely to change: Raul has been in charge since 2008 and has no
plans to step down until his term as president is up in 2018. He
has remained a supporter of the reforms despite disagreements
with his brother.

But it would be unrealistic to expect a swift transition to a
more open market economy, as I’ve learned from 25 years spent
following Latin America’s economies and politics. Internal
opposition to the reforms persists in Cuba, which helps explain
why implementation of the reforms has been slow, and with the
election of Donald Trump, the thaw in relations with the United
States that has encouraged those reforms is, for the time being,
in question.

The thaw begins

Since Raúl Castro began a series of reforms after replacing his
ailing brother as president in 2008, market forces have begun to
play a larger role in the Cuban economy.

Cuban citizens are now allowed to operate small businesses
such as restaurants, barber shops and room rentals, and they can
buy and sell homes. Individuals and cooperatives are allowed to
cultivate unused plots of land. Managers have been given more
autonomy to allocate resources.

These reforms have been accompanied by fewer restrictions on
travel by Cubans abroad and by the gradual spread of
communication technology. Cellphones are more common in Cuba than
they were just a year ago, and Wi-Fi spots have become popular in Havana,
though so far not many exist.

A slow pace

Alexandre Meneghini/Reuters

The pace of reform, however, has been uneven and
slow. Self-employment is still limited to specific and usually
unskilled activities. Architects, for example, may drive taxis
but still cannot go into business in their own profession.

The government explicitly prohibits the accumulation of wealth –
hardly an incentive to entrepreneurship – though it is hard to
imagine that this is enforced effectively. And backtracking has
occurred in some areas.

In January, for example, the state shut down some street vendors and
asserted control of part of the food distribution system, which
had earlier been opened to private participation.

And not everyone in Cuba is happy with the reforms. The Cuban
government laid off almost 600,000 government workers from 2010
to 2014 in an effort to improve productivity and free up labor for the private sector. While
there have been no announcements recently of plans for further
layoffs, the three-quarters of Cuba’s workers that are still on
government payrolls are apprehensive. Complaints that tourists
and rising incomes in the private sector are raising prices are
common in Havana.

As the government seeks to encourage a more vibrant economy in
the face of resistance to change, the outcome is likely to be a
continuation of the reforms, but at a controlled pace. Raul
Castro indicated as much at the Communist Party
Congress in April, when he said Cuba’s reforms would proceed with
“neither haste nor pause.”

Two economic shocks

Growth is decelerating sharply this year as Cuba struggles to
cope with two external shocks.

Alexandre Meneghini/Reuters

First, prices for Cuba’s traditional exports of nickel,
refined oil and sugar have fallen with global commodity prices
since mid-2014 and remain low. Second, with its own economy in
shambles, Venezuela cut supplies of oil to Cuba by as
much as 40 percent.

Cuba has traditionally swapped medical services for oil with
Venezuela and sold the oil it refines from Venezuela to the rest
of the world. As a result of the cutbacks in oil imports, Cuba
has had to ration energy domestically and delay payments to
foreign creditors, while its oil export earnings plummet.

While rumors of a return to the hardships Cuba suffered in the
early 1990s after the loss of subsidized trade with the Soviet
Union are exaggerated – earnings from tourism will help offset
the lower oil imports – Cuba will be lucky to eke out any growth
at all in 2017.

A third shock

Cuba may yet be hit with a third shock: a chilling of relations
with the United States.

The normalization of relations between the two countries has
supported Cuba’s reforms by supplying a stream of new visitors to
the island and by increasing Cuba’s connectivity with the rest of
the world. Although tourism is still banned under the Helms-Burton Act of 1996, in 2015 140,000 U.S.
citizens took advantage of one of the 12 licenses
established in December 2014 under which the United States
permits travel to Cuba – a 54 percent increase over 2014.

U.S. airlines commenced regular air service to Cuba this
year, and several cruise lines now offer trips to the island.
Several U.S. mobile carriers have signed voice, text and
data-roaming agreements with Etecsa, the Cuban telecommunications
provider. A Florida-based bank has issued a credit card intended for use in
Cuba, and U.S. credit cards are accepted for currency
transactions at state-owned foreign exchange facilities in
Havana, though they so far do not work elsewhere in Cuba.

What’s next

Barack Obama and Raùl
Castro.AP Photo/Ramon
Espinosa

Absent details on the president-elect’s intentions on Cuba, it is
difficult to see how relations will unfold. Here’s my read on the
situation:

The new administration will initially take a hard line on Cuba –
to do otherwise would appear to be backing down from campaign promises. History suggests, however,
that Cuba will steadfastly resist demands on human rights or
democratic reforms, even if it means enduring considerable
hardships. This means that a standoff and worsening of relations
is possible, which could involve restrictions on travel and
trade.

But there are long-term costs to isolating Cuba.

A chill in relations would mean U.S. businesses would lose out to
foreign competitors. Cuban-Americans could have their ability to
see and support relatives in Cuba hampered. Americans would not
be able to enjoy travel to the island or to buy Cuban cigars and
rum.

Cuba, meanwhile, has an obvious interest in avoiding isolation.
Tourism provides a good example. According to a 30-year development plan by Cuba’s Ministry of
Tourism, capacity in Cuba’s hotels is to grow from 63,000 rooms
today to 85,000 in 2020 and 200,000 in 2030. It is hard to see
how those hotel rooms can be filled with a full U.S. trade and
travel embargo still in place.

The day after Fidel Castro’s death, Trump called him a “brutal dictator” and said
“our administration will do all it can to ensure the Cuban people
can finally begin their journey toward prosperity and liberty.”

The second phrase suggests that he is leaving the door open to a
rapprochement. Trump sees himself as the “negotiator in chief,”
so the temptation to try to get a better deal from Cuba will be
strong. Such negotiations, however, are bound to be to be
difficult: Human rights, claims for expropriated property and
Cuba’s insistence on compensation for damages from the embargo –
issues on which little or no progress was achieved in past talks
– will all be on the table.